• Barbara Singh

5 Things to Do Before Applying for a Mortgage

With mortgage rates at an all-time low, we are seeing a lot more activity on the market with many properties selling only a couple of days after listing and well above asking/list price. Purchasing a house can therefore become more stressful as you are competing with other buyers/multiple offers and hoping that your offer gets accepted. Before you even reach that stage,you will need to secure a mortgage. This can be challenging for many homebuyers, especially those who are not prepared.


If you want to improve your chances of a mortgage approval with favorable terms, these are the top 5 things you should do before applying for a mortgage.


1. Know How Much You Can Spend

Most lenders use what's called the 28/32/40 rule. That means your monthly mortgage payment must be no more than 28% of your gross income, your total housing payments should be no more than 32% and your maximum total monthly debt payments

- including your potential mortgage, car loans, student loans, line of credits, and any other payments you make must accumulate to no more than 40% of your gross income. There can be slight variance to these ratios, but it's a fairly dependable guideline for figuring out your mortgage limit.


RELATED ARTICLE: Mortgage Affordability - How Much Can You Afford?


2. Raise Your Credit Score

One of the key factors in determining whether or not you will get approved for a mortgage and what rate you will pay, is your credit score. Lenders typically like to see borrowers with a minimum credit score of 680 before approving mortgage applications. A lower credit score generally means the borrower is more of a risk and might be less capable of making mortgage payments on time. Once you know your credit score, there are a few things you can do to raise it, increasing your chances of getting more favorable terms.


RELATED ARTICLE: Don't Let A Low Credit Score Hold You Back - 6 Ways To Repair/Improve Your Credit Score


3. Pay Off Debt

As mentioned above, lenders do not want you to have more than 40% of your gross income committed to debt. One way to lower the ratio is to pay off credit card debt(s), car loan(s), and any other debts you may have. A tip is to start with the lowest amount and to concentrate on paying that off 1st while hitting the minimums on the others. Paying off these type debts is better said than done, so pay off if you can, but pay down as much as you can to have the balance no more than 50% of the credit limit, this relates specifically to revolving credit. This is one way that your credit score will start to improve - and paying on-time.


4. Know What You Need

When applying for a mortgage, lenders will want a package of documents. These can include recent pay stubs, most current Notice of Assessment from the CRA, employment Letter and T4’s if applicable. In addition to these documents, you must be prepared to provide bank statements to show proof of income deposits and bank statements to show proof of down payment funds (90 days). This gives you an idea of what type of documents lenders will require but, they are not limited to only these documents.


5. Avoid any big purchases

Even after you receive an approval for a mortgage, the lender will continue to monitor your finances throughout until the closing, this can even include pulling a 2nd credit report. One of the easiest ways to have your mortgage cancelled is to take on more debt before your mortgage closes.



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